The dollar supported by strong U.S. economic data

Euro

The dollar started the week on stronger ground against the euro as traders waited for the capital flows report. The data was expected to show that the US had attracted $65 billion of inflows in June, a large enough figure to cover its trade deficit of $58.8 billion in the same month. The actual figure came in at $71.2 billion, which lead to the greenback gaining further. However, the dollars gain was restricted as the data revealed that foreign demand for US treasuries, which is key to financing the budget deficit dropped.

By early midweek the dollar was trading near a one-week high against the euro as economic data released supported expectations that the Federal Reserve will continue its campaign of raising interest rates. The US Labour Department reported that the consumer price index for July rose 0.5 percent, with a core reading excluding food and energy rising 0.1 percent. Economists had forecasted a 0.4 percent increase in the overall index and a 0.2 percent rise in the core index.

The inflation data was considered tame, but at the top end of the Fed's comfort zone, hence giving the central bank enough reason to keep raising its interest rates. However, market attention was soon focused on industrial production figures for July which showed that industrial output rose a smaller than expected 0.1 percent in July, leading to the greenback losing ground.

As the week progressed, these loses were short lived as the dollar rose to its highest level in two weeks against the euro after the U.S. producer price index, a measure of inflation, increased 1 pct in July versus markets' expectation of 0.5 pct rise, on soaring energy costs.

Moreover, the dollar got a further boost after Philadelphia Federal Reserve Bank said its business activity index jump to 17.5 in August from 9.6 in July. Meanwhile, U.S. jobless claims rose to 316,000 in the week Aug 13 from 310,000 the prior week. Data released from the eurozone showed that the annual rate of inflation, excluding volatile energy and unprocessed food costs was steady at 1.4 percent in July from the previous month, reinforcing expectations that the European Central Bank will be cautious about cutting interest rates.

A speech from the U.S. Federal Reserve Chairman Alan Greenspan, U.S. business confidence surveys and U.S. durable goods orders will be top of the economic agenda for financial markets next week. Meanwhile in Europe, the ZEW institute's gauge of German analyst and investors confidence and the Germany Ifo business confidence index will be watched closely for clues about the outlook of Germany's economy.

Range for this week: $ 1.2000 - $ 1.2300 (AED 4.4076 - AED 4.5178)

Japanese Yen

The yen kicked of this week on slightly weaker ground against the dollar as the market awaited the capital flow report. The dollar strengthened slightly to 109.60 yen but remained close to a six-week low of 109.30 yen hit on Friday. Despite the US capital flow figure of $71.2 billion, the yen reached a seven-week high of 109.05 per dollar.

The yen strengthened due to continued optimism over Japanese economic recovery resulting from higher stock prices and capital inflow figures that have pushed the yield on the benchmark 20-year Japanese government to a 9-month high.

The yen also drew support from optimism that Japanese Prime Minister Junichiro Koizumi may win the election on Sept. 11 and drive economic reforms forward.

By midweek the yen strength continued as the Nikkei share average hit a four-year intraday high near 12,370 and had risen almost 5 percent over the past seven sessions. However, after a series of US inflation figures released confirmed investors expectations that the Federal Reserve would continue increasing interest rates, the dollar rallied to 110.32 yen.

In the week ahead, markets will keep a close eye on Japanese consumer prices and Japan's trade figures for clues on the outlook of the world's second largest economy.

Range for this week: Y 109.00 - Y 112.00 (AED 0.032795 - AED 0.033697)

Sterling

Sterling started the week on a low note, moving away from six-week high's against the dollar after the London Retail Consortium showed that retail sales had fallen at their sharpest annual rate in July since comparable records began in October 2002. Further support was given to the dollar after the US capital inflow data came in and sterling was trading at $1.8077. A reversal of cable's misfortunes soon followed ahead of the release of UK inflation data.

The Office for National Statistics reported the consumer price index rose 0.1 percent in July, taking the annual rate up to 2.3 percent from 2.0 percent in June and stronger than a forecast of 2.1 percent. Cable further rallied after the release of this data and hit a session high of $1.8146, as the data released cemented expectations that UK interest rates are unlikely to fall further in the near future.

Later in the week, sterling rallied to its highest level against the euro in six weeks after minutes from the Bank of England's latest policy meeting showed bankers split 5-4 on this months rate cut, suggesting the BoE would not rush to cut rates again.

However, this information was not strong enough to support the pound against the dollar after a series of good economic data was released from the US. Moreover, sterling lost further ground against the dollar after the office for National Statistics said British retail sales fell by 0.3 pct in July from a downwardly revised 1.2 pct gain in June.

Range for this week: $ 1.7800 - $ 1.8100 (AED 6.5379 - AED 6.6481)